Oct 6
The taxpayers, S, A and P, were family members who built up a betting business run through a company “SJA” which was later sold to a company in Gibraltar “SJG” of which they were also shareholders. The effect of selling the business was that bets placed outside the United Kingdom with SJG would not be subject to UK betting duty. The revenue made assessments to tax on S, his wife A (an Irish citizen) and their son P pursuant to the transfer of assets abroad (“TOAA”) code (at the material time contained within Part XVII of the Income and Corporation Taxes Act 1988) on the basis that they had “power to enjoy” income of SJG. Each was assessed as liable to income tax on the profits of SJG for the years of assessment from 2000-2001 to 2007-2008 inclusive, on the basis that they were subject to charge under section 739 of the Income and Corporation Taxes Act 1988 and, later, section 720 of the Income Tax Act 2007. The First-tier Tribunal allowed A’s appeal on the basis that the TOAA code was not compatible with European Union law rights which she enjoyed as an Irish citizen, but dismissed the substantive appeals of S and P. The Upper Tribunal, allowing the taxpayers’ appeals, held that the TOAA code was not engaged at all and that, even if it had been, the taxpayers would all have had available to them the motive defence in section 741 of the 1988 Act. The Upper Tribunal further considered that both A and S could invoke article 49 of the Treaty on the Functioning of the European Union.
On the revenue’s appeal—
Held, appeal allowed in part (Phillips LJ dissenting). (1) Section 739 of the 1988 Act had long been recognised to be a “penal” provision with a deterrent function which was not to be narrowly construed. That being so, Parliament could be expected to have intended that the provision should be capable of applying to an individual who procured a transfer without himself executing it. Where two or more individuals, acting for themselves (whether or not also acting as agents or company officers), together caused a company to effect a transfer, they would be quasi-transferors and within the scope of section 739 of the 1988 Act. Approaching matters on that basis, section 739 would not apply to a director with no shares who promoted a transfer because he believed that to be in the company's interests: he would have acted exclusively as a company officer. Nor was section 739 applicable to someone who simply did nothing: the fact that he might have been in a position to prevent a transfer (say, as a controlling shareholder) did not mean that he “procured” it. If, on the other hand, a group of shareholders decided on a transfer and brought it about, they could all be considered quasi-transferors. It had to be remembered that someone in such a position would still escape any liability unless he had “power to enjoy” income of a person resident or domiciled outside the UK as a result of the transfer or if the exemption for which section 741 provided was applicable. It followed that, in the present case, the Upper Tribunal had erred in accepting S and P’s contention that not having effected the transfer of the business to SJG personally, the TOAA code was not engaged and they could not be charged to tax. However, on the facts, the Upper Tribunal had been right to conclude that A could not be regarded as a quasi-transferor (post, paras 63, 71–74, 138, 139).
(2) The First-tier Tribunal had been right to reject the taxpayers’ contention that section 739 of the 1988 Act had no application unless income tax had been avoided and that, in the present case, no such avoidance had been established. Section 739 nowhere stated that income tax must in fact have been avoided and, had that been Parliament’s intention, it could be expected to have spelled out what was required (paras 75–76, 138, 139).
(3) Section 741 of the 1988 Act provided that section 739 did not apply where, inter alia, the transfer and any associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation. On analysis, it was not open to the taxpayers to rely on section 741 on the basis that betting duty was borne by customers rather than bookmakers or that the transfer to SJG had involved mitigation rather than avoidance of such duty. The Upper Tribunal had been wrong to find that the tribunal had proceeded on the basis that any tax avoidance purpose at all would preclude reliance on the second limb of section 741. Furthermore, the Upper Tribunal had not been entitled to interfere with the tribunal’s conclusion on the basis that the main purpose was saving the business and betting duty avoidance was “simply the means of achieving” that purpose. The avoidance of betting duty and saving of the business were inseparable (paras 84, 89–91, 138, 139).
(4) In all the circumstances, section 739 of the 1988 Act did not infringe A’s freedom of establishment under European Union law in any relevant way and, in consequence, there could be no question of either S or P being able to invoke EU law to defeat the assessments on them ( paras 110, 115, 138, 139).
David Ewart QC, Oliver Conolly, Brendan McGurk and Barbara Belgrano (instructed by Solicitor, Revenue and Customs) for the revenue.
Philip Baker QC and Rory Mullan QC (instructed by Sharpe Pritchard LLP) for the taxpayers.